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Stocks and shares ISAs explained

If you’re looking for a savings or investment account that will give you good returns over the long term, you may have come across stocks and shares ISAs. But what are they, how does a stocks and shares ISA work, and what are the returns you might actually get? We explain everything you need to know about stocks and shares ISAs.

What is a stocks and shares ISA?

A stocks and shares ISAs, also called an investment ISA, is a type of investment account, as opposed to a traditional savings account. That means you’ll be investing in companies, government and corporate bonds and investment funds, rather than putting your money away into a savings account that provides risk-free returns, as long as your deposit is protected by the Financial Services Compensation Scheme (FSCS). 

Stocks and shares ISAs can be volatile. You’ll be investing in the stock market, which, as we’ve experienced over the last decade or so, can go up as well as down. That means you could lose money on your original investment. You should typically be prepared to make a long-term investment, as this may mean your returns have a chance to recover from any drops in the market. Equally, you could stand to make significant gains, but there are no certainties.

How do stocks and shares ISAs work?

With a stocks and shares ISA, you won’t pay income or capital gains tax on any returns you make on your investments. You can choose to open a managed stocks and shares ISA and pay for a fund manager to manage your investments on your behalf, or you can make your own decisions on where to invest your money. How comfortable you feel with this will typically depend on your level of experience in stocks and shares.

You can either invest all your allowance into a stocks and shares ISA, or you can split it across different types of ISAs, which include cash ISAs, innovative finance ISAs and lifetime ISAs.

What is the stocks and shares ISA allowance for 2020/21?

Every adult in the UK has an ISA allowance of £20,000 per year (current for the 2020/21 tax year which runs to 5th April 2021) that you can invest or save tax-free. This £20,000 limit is a combined limit across all the ISAs you hold, and you can only save into one of each type of ISA per year.

Your ISA limit is the maximum you can pay into your account, rather than the total value of your investments. If you put your total ISA allowance into a stocks and shares ISA and the stock market fails, you might not get any returns and you won’t be able to make any further investments during the same tax year.

Should I invest in a stocks and shares ISA?

You could get a much better return from a stocks and shares ISA than a cash ISA or a traditional savings account, but this type of investment doesn’t come without risk. It’s important to understand all the pros and cons and ensure that you’re comfortable with the risk you’re taking, as well as all the potential outcomes.  

As the stock market is unpredictable, it’s entirely possible that the value of your investments will go down as well as up, and there might be times when you get back less than you’ve originally invested. 

Investing in a stocks and shares ISA is a personal choice that should be based on your long-term savings goals.

How do I choose a stocks and shares ISA?

When choosing a stocks and shares ISA, any experience you have in investing or the stock market will help. If you have experience and feel confident about controlling your stocks and shares ISA yourself, you can simply compare shares and funds, and choose the ones that are right for you. This is called a self-select stocks and shares ISA.

If you’re new to investing or don’t know how to choose the funds to invest in, you may want to consider opting for an investment fund. That means you’ll have a fund manager who can select investments on your behalf. Your money will be pooled along with other investors’ money, and the fund manager chooses where that money goes. 

It’s important to note that you’ll probably be charged a fee for an investment fund, which could include paying for both a fund manager and the investment platform. Different investment platforms charge different fees, which you’ll still have to pay whether your investment makes any money or not. It’s worth taking the time to understand the small print, including fees and charges, before committing to any financial product.

What are the returns on stocks and shares ISAs?

Stocks and shares ISAs can provide investors with strong returns, but it’s impossible to say exactly what those returns might be because of the unpredictability of the stock market. Additionally, returns aren’t guaranteed, and no one knows how much your investment will go up or down. 

It may be best to look at stocks and shares ISAs as long term investments in order to increase your chance of profitable returns.

Is my investment safe?

When you invest in a stocks and shares ISA, the Financial Services Compensation Scheme (FSCS) protects your investments up to £85,000 per person, per firm you invest with.

Are there any alternatives to stocks and shares ISAs?

If you don’t have an appetite for risk, it’s worth considering alternatives to stocks and shares ISAs. Fixed rate bonds, for example, provide a guaranteed return on your deposit over a set time, and typically offer competitive fixed interest rates. This means you’ll know exactly how much interest you’ll earn and how long your money will be locked away for.

Six month fixed rate bonds might be right for you if you’re looking for a short-term savings option.

Five year fixed rate bonds could be a good option if you want to watch your lump sum grow over the medium term.

Open fixed rate bonds at Raisin UK

While we don’t offer stocks and shares ISAs at Raisin UK, you can quickly and easily open fixed rate bonds by registering for a Raisin UK Account and logging in to apply. 

Opening an account with Raisin UK is free, allows you to manage multiple accounts in one place, and offers competitive interest rates from a range of UK banks.

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